Profit And Loss Account

It is prepared to calculate the net (ultimate) profit made or net loss incurred by a business enterprises for a given accounting period. Profit and loss account starts with gross profit on the credit side brought forward form the trading account. It is also credited with any other item of income and gain such as rent receivables, interest on investments, discount receivable and the like. In case of gross loss brought forward from trading account, profit and loss account begins with gross loss as the first item on the debit side Other items on the debit side include indirect or running expenses of the business that is, expenses incurred on selling and distribution of the goods and the general administration of the business. When the credit side (revenues) exceeds the debit (expenses) side, the difference is net profit. But, if the debit side exceeds the credit side, the difference is net loss. Net profit is the surplus remaining after charging against gross profit and other non-trading income and receipts all the indirect expenses including depreciation and other provisions properly attributable to the normal activities of a business. The contents of the expenses must be arranged in logical order and profit and loss account must be prepared on the basis of the rules applicable to a nominal ledger account with Dr. and Cr. Sides. Profit and Loss Account is balanced by transferring net profit to the capital account(s) in the balance sheet and net profit thus increases the capital; the net loss uniform order in which items should be set out in a Profit and Loss Account, but the following sequence is frequently adopted in practice:

Debits

(i)    Gross loss as per trading account (if any)

(ii)    Establishment charges e.g., rent rates, lighting etc..

(iii)    Administration expenses e.g., rent rates, lighting etc..

(iv)    Selling and distribution charges e.g., advertising, traveler’s salaries and commission, carriage outwards or on sales packing materials etc..

(v)    Depreciation and other provisions.

(vi)    Extra-ordinary expenses e.g., loss by fire, loss by embezzlement etc..

(vii)    Finance chares e.g., loan interest.

Credits

(i)    Gross Profit (if any)

(ii)    Miscellaneous income e.g., rents received, discounts receivable.

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